Financial Independence Debate: Save More or Make More

Today I would like to discuss my personal opinion/strategy on whether focusing on saving money and optimizing lifestyle costs or making more money through active and/or passive income is the better route to achieving Financial Independence. To anyone who is active in the FI community the natural answer is that both sides of the ledger are important. It is impossible to achieve a high savings rate which is the nucleus of any early retirement strategy if you only focus on saving or earning with disregard for the other. While I concede that this widely held belief is true, I do believe that from an effort (time, energy, etc.) standpoint there are optimal and sub optimal approaches. The remainder of this post will discuss my tactics which I find to create the maximum ratio of results (output) to effort (input).

1st Tactic: Waste

The 1st tactic which I find to be the lowest hanging fruit by far is to reduce waste. This step is especially true for anyone new to the Financial Independence mindset who has done little to no life optimization as there will be more opportunities for waste removal. This is the best tactic because as you identify things which are truly wasteful (Defined as using things carelessly, extravagantly or for no purpose), they can be sold/discontinued/etc. without any impact to your life or well-being. Many people’s first reaction is to say that they are not wasteful as even in the affluent society of America this is mostly frowned upon. However, almost everyone has a gym membership, cable package, magazine subscription, etc. which they don’t use. Removing items like this results in savings which goes right to the bank.

2nd Tactic: Cars and Housing Optimization

The 2nd tactic is to aggressively optimize your housing and transportation costs. According to the Bureau of Labor Statistics’ 2016 Consumer Expenditures, 32.9% of expenses for American families is on housing and another 15.8% is on transportation. This means that just these two categories make up nearly 50% of the lifestyle costs for most people. Since cars and houses make up half of the pie, I think that focusing on saving money in these areas is the best bang for the buck. In both of these categories there are several strategies which could lead to hundreds or thousands of dollars in savings.

In the Car category I believe in one of two purchases strategies. The first is to buy an older car in decent shape for under $2,500 and drive it until it dies or has a very costly repair. I have employed this “Beater” method several times and have often been able to get many years out of one of these low cost no payment cars. The second option is to buy a gently used car, 3-5 years in age, and to drive it until it reaches its end of life as mentioned above. This method should give you more years of utility from the car than the Beater method and it still avoids the maximum depreciation which occurs in the first few years of a car’s life. After an economical purchase method is employed I firmly recommend pricing out car insurance options every year. My experience has been that you can save money by changing companies almost every time.

In the Housing category I follow three different strategies. The first is to buy the smallest house that meets your needs. Please don’t take the previous statement as me recommending that everyone move into tiny houses. I feel a family should buy a house that has the size that supports there needs not the needs of the bank who created the mortgage. If you have bedroom/s or bathroom/s that get their most action on “cleaning day” then downsizing might be a way to save a significant amount of money.

The second Housing strategy is to ensure you are getting the best possible rate on Housing related bills. I include things like Property Insurance, Cable, Garbage and even the Mortgage itself in this bucket. As I mentioned above in the Car section, I have found most companies that provide these services have discounted packages for new customers which are cheaper than you will currently be paying.

The third and last strategy in the Housing category is to DIY as many improvement and maintenance projects as possible. I have found over and over again that by doing the work myself I save hundreds or thousands of dollars. Now some people will say that they are not handy, but I have on several occasions fixed items in my house which I had no previous knowledge of by watching YouTube videos and reading internet forums. In each of these situations I saved over $500 by not having to call out a service repair technician.

Diminishing Returns

Since so far the entirety of this discussion has been spent on tactics to save money I would guess that anyone reading this would expect that I believe that saving money is the more important area to focus on, however you would be wrong. Outside of the tactics discussed above I think that trying to cut lifestyle costs further is less of an opportunity and is more difficult than trying to make more money. Since there is a limit to how much expenses can be reduced, once the big ticket items are under control it is impossible to avoid the law of diminishing returns. In other words as your expenses are reduced and your lifestyle costs are optimized each additional cut or optimization is increasingly more difficult to execute. The good news for those of you who are disheartened by this fact is that making more money usually works in the opposite fashion.

Sky’s the Limit: Compounding Gains

Since there is no upper bound to how much money a person can make, I know people believe this to be made up, often times as you make more money it gets easier to make even more. The reasons behind this phenomenon are many but often they come down to things being based in percentage increases and a compounding effect. I’ll walk you through one simple job related example.

Let’s say you currently earn $50,000 per year and that you put in extra effort at work which earns you a promotion and a 10% salary increase which gets you up to a salary of $55,000. This is great, but it is only the first step. The next is that assuming that your company behaves typically now your 3% annual cost of living raise is going to be $1,650 instead of $1,500. This is one example of the compounding effect that goes on into perpetuity even if you stay in the same job. Lastly let’s assume that a year later with the experience from this higher level position you decide to look at other employment opportunities. Most employers realize that people don’t want to change companies for less than a 15% increase in pay even if the jobs are similar. So at a bare minimum the 15% raise above the $56,650 will be more than a 15% raise on the $51,500 had you not received the promotion a year prior.  The best part is that this is the worst case scenario for the new job.  With the better work experience you could command significantly higher.

I have experienced this phenomenon in my own career.  I was lucky enough to start out my career as an engineer making $60,000 a year.  Now almost a decade into my career I have more than doubled that to $130,000 a year.  That may seem like impressive growth, but it was all related to the smaller increases in situations like detailed above.  This type of increase on a percentage basis ($30k to $60k, $40k to $80k, etc.) is very doable for someone in the first decade of their career as most employees start off at a very low salary and they make the most job changes statistically.

Final Thoughts

Based on this experience I am a firm believer that its much better to focus on making more money.  Had I taken the time I put into excelling at my job and put it into optimizing my lifestyle costs I would have had much less success.  My family has annual expenses of roughly $50,000 which I believe with maximum effort and pain (think no dessert) could be reduced to about $30,000.  Now this $20,000 in savings would make a big difference, but I’ve been able to increase my salary by more than 3x that amount.  This also doesn’t include other strategies for income which I currently do not utilize like starting a business, real estate investing or other side hustles.  These opportunities are available to anyone even people in careers where income growth is harder to come by.

So my plan is to continue to capture the low hanging fruits on cost cutting and then spend the rest of my time focusing on how to generate more income.  Please share your thoughts.

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